A Primer on Regulation
Of U.S. Stock Markets

The furor over Dick Grasso's $187.5 million pay package for
running the New York Stock Exchange has increased the level scrutiny on how
companies are run and how much executives are paid. Following his resignation
as chairman and CEO of an organization that, in part, regulates business on
Wall Street, fresh attention is being given to governance standards. Securities
and Exchange Commission Chairman William Donaldson is calling for the 10 major
stock exchanges to spell out the compensation of their executives and who sets
it.

Since the spate of corporate-accounting scandals, transparency
has been the watchword of regulators seeking to make public companies accountable
to their shareholders. Now, the heat is on those who maintain Wall Street's
standards. See a primer on who regulates what in the securities industry.

The agency enforces federal securities laws, and while Congress
makes and passes the laws, the SEC is heavily involved in writing the laws,
particularly the more technical aspects, says Alan Bromberg, professor of securities
law at Dedman School of Law at SMU. In theory, Congress only holds hearings
to determine if new legislation is needed, but has held some investigative
hearings, such as the analyst conflict-of-interest cases last year.

The SEC, by law, requires that public companies disclose financial
information to the public. It does conduct some investigations, but generally
leaves that up to exchange regulators, who may then hold a panel hearing on
the matter. Appeals of panel decisions involving a penalty or sanction may
escalate to the SEC, but this is rare.

The SEC's powers have increased with recent changes in legislation,
where the agency, without congressional approval, can suspend a broker and
even put them out of business, or bar executives from serving on boards or
as CEOs of major companies.

Since its creation in 1934 to help restore investor confidence
in capital markets by providing more structure and government oversight, the
SEC's reach has broadened to include regulation of the New York Stock Exchange,
the American Stock Exchange and the National Association of Securities Dealers,
which operates the Nasdaq Stock Market.

The SEC is comprised of five commissioners, all of whom are
appointed by the president of the U.S., with the advice and consent of the
Senate. No more than three of the five may belong to the same political party.

The New York Stock Exchange

The NYSE was given a self-regulatory mandate by appointment
of the SEC, to ensure that its member firms comply with federal securities
laws, as well as the exchange's own. The exchange's regulators are responsible
for monitoring member firms, launching investigations when there is suspected
misconduct -- be it in customer-sales practices or on the trading floor --
and penalizing members when they commit violations.

Penalties range from informal actions, such as sending an education
or admonition letter to bringing formal charges. Appeals of these decisions
are taken to the NYSE board of directors and then to the SEC, and may escalate
as far as the U.S. Court of Appeals and even to the Supreme Court. The exchange
also has the right to expel, suspend or fine any firm under investigation or
that refuses to comply with an investigation.

Since the resignation of Dick Grasso, the NYSE's chairman and
CEO, the exchange's self-regulatory model has been under intense scrutiny.
The SEC plans to consider whether to split off the regulatory function of the
NYSE and other stock exchanges as part of a larger review. SEC officials are
concerned that acting as both a regulator and a marketplace may create conflicts
and that investors might be better protected if regulation were handled by
an independent entity. Two possibilities are allowing the exchanges to continue
monitoring market practices but outsourcing regulation of member firms; and
creating an independent regulator to take over all the regulatory duties --
a miniature SEC, of sorts.

Some SEC officials are interested in a third option: stripping
the NYSE and other exchanges of all self-regulation authority and letting the
SEC oversee the markets. But that scenario isn't likely since it would require
a significant boost in the agency's budget and work force.

For the NYSE, the questions come amid accusations that it is
too light-handed with its member firms, more inclined to push members to hire
consultants or recruit independent directors, than to levy hefty fines. Some
say this is fueled by member firms sitting on the board which is charged with
the task of regulating them, as was the case with Ken Langone, a founder of
Home Depot.

National Association of Securities
Dealers

The National Association of Securities Dealers is the parent
company of the Nasdaq Stock Market. It is in the process of splitting its marketplace
from its regulatory arm.

Its regulatory function operates in a similar way as the NYSE's
-- its job is to make sure its members comply with federal securities laws
as well as the exchange's own laws. It conducts investigations into member
firms, holds hearings and issues penalties.

However, it differs in two huge ways: 1) it has moved to split
the regulatory and market functions, as opposed to the NYSE's self-regulatory
system, and 2) it is known for being much harsher than the NYSE in terms of
issuing penalties.

"The NASD takes its enforcement role much more seriously," said
New York attorney Bill Singer, who defends clients before both the NASD and
the NYSE. "If you had a choice, you'd rather be sanctioned by the NYSE."